In gloomy economic times, desperate people are particularly vulnerable to loan sharks. This, allied to the rapaciousness of some of these fringe lenders, has provided the Government with incentive enough to act. It cannot be said to have been in any great rush. Finally, however, a draft of the Credit Contracts and Consumer Finance Amendment Bill has been released. Its strong point is its practicality, and it should be welcomed by communities in areas such as South Auckland that have suffered at the hands of loan sharks' exorbitant interest rates and fees and dubious tactics.
If the Government's tardiness were to be excused, it would be because the problem is more complex than it appears initially. Fringe lenders provide a service for people who cannot get loans from banks because they are unattractive risk propositions, thanks to low incomes, lack of jobs, or poor credit histories. Any response must, therefore, be designed not to drive large numbers of lenders out of business. Rather, it must encourage them to act more responsibly, so their clients are not trapped by spiralling debt.
The Government's approach includes making it illegal to lend money to someone whose loan repayments would likely cause "substantial hardship". Clearly, that will require a judgment by the lender, with all the potential potholes that implies. In practice, however, a person's suitability for a loan should be obvious enough after the "reasonable inquiries" decreed by the bill.
The legislation will also require more timely and complete disclosure of loan terms, as well as extending the cooling-off period for borrowers to cancel their loan from three to five days. Better controls against misleading or confusing advertising will further help borrowers to understand what they are taking on. Additionally, they will have improved conditions to renegotiate loans because of unforeseen hardship.
The most obvious omission from the bill is a cap on the interest rate that loan sharks can charge. This has long been advocated by many of those seeking reform. It was included in a bill championed by Labour MP Carol Beaumont, which was dismissed by the Government during the last parliamentary term. Caps are relatively common overseas, but there are good reasons for rejecting the idea. In many jurisdictions, the cap has had to be made so high - 48 per cent in some Australian states - that it can hardly be said to be a deterrent to lenders. Worse, it tends to become the default rate.
